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Bond Markets Finally Make A Break, But In Wrong Direction
Posted to: Micro News
Thursday, January 10, 2013 10:10 AM

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After three sessions of eerily calm and slightly positive trading, bond markets are getting back to the brisker moves that characterized last week's rout. Unfortunately, the brisk moves are, once again, in an unfriendly direction, bringing 10's back to the edge of 1.9's.

The strain and pain began mainly in Spain. Well... Not really, but a stronger than expected Spanish debt auction added to pressure already in place from stronger Chinese export data. The bigger kick whilst down came from another generally rosy Press Conference with ECB Pres Draghi that began concurrently with the Jobless Claims report at 8:30am.

Claims, though higher than expected, were a complete non-issue this morning, and markets are clearly pre-occupied with two much bigger issues: trading global central bank policy and keeping pace with tradeflows/technicals.

The ECB stuff is easy enough to understand. The ECB didn't lower rates, didn't take the deposit rate into negative territory (both of which were speculated), and Draghi was on record with all manner of economically bullish anecdotes. These included mention that that he didn't see need for any further easing and that the ECB merely needed to "see signs of a recovery" before an exit from accommodative policy (that's a big jump from the US Fed's stance on keeping accommodation in place until well into the recovery).

The tradeflow/technical picture is also fairly straightforward, provided you're up to speed on the long term significance of the mid 1.8's zone in 10yr yields. With some exceptions, it's been the dividing line between the past 7 months of bond market repression and the previous 7 months of "only moderate repression."

Failure to break definitively back underneath 1.865 yesterday was bad enough, but this morning's bounce up to 1.90+ is ominous. Markets are attempting to convince us that the long term interest rate lows are in as of mid 2012, and to confirm that possibility with a sustained break over the inflection point in the mid 1.8's. Scary times...

Intraday yields were as high as 1.975 last week, so we got that going for us. If we don't sell off another 7 bps today, we'd at least have a "lower high" coming down from there, but the bigger deal is likely still the 1.86+ break. It was a ceiling before, and now to see it acting as a floor (providing a bounce even...) is very unfriendly from a technical perspective.

Fannie 3.0s are down 9 ticks at 104-10 and 10yr yields are currently up 4.5 bps at 1.9047. The next biggie this afternoon is the 30yr Bond auction, but we're not sure that has the potency to spark a move back under 1.865 unless we were to start moving that direction now, and for other reasons. As of now, we're just edging into the weakest levels of the morning. There's even a slight risk that the earliest priced lenders are already considering a negative reprice.




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